Interpretive Notices

9072 - NFA COMPLIANCE RULE 2-49: SWAP VALUATION DISPUTE FILING REQUIREMENTS

(Board of Directors, May 18, 2017, effective January 2, 2018.)

INTERPRETIVE NOTICE

Commodity Futures Trading Commission (CFTC or Commission) Regulation 23.502(c) requires Swap Dealers and Major Swap Participants (collectively SDs) to promptly notify the Commission (and other enumerated regulators) of any swap valuation dispute that exceeds $20 million (or equivalent amount in another currency) (the $20 million Reporting Threshold) within certain timeframes depending on counterparty type (the Resolution Period).¹ On January 21, 2016, the Commission issued an Order authorizing NFA to, among other things, receive and review notices of reportable swap valuation disputes.²

NFA Compliance Rule 2-49 authorizes NFA to require SDs to promptly submit relevant information to NFA in the form and manner prescribed by NFA. Beginning March 1, 2016, NFA required SDs to submit notices of reportable swap valuation disputes to NFA. Based on NFA's experience with these notices, NFA has determined that the notices will be more useful for NFA's monitoring and risk profiling of SDs if NFA collects standardized information that can be easily tracked and analyzed across SDs and the industry. Therefore, SDs will be required to electronically notify NFA of a reportable swap valuation dispute by completing an NFA form requiring specified information. NFA will notify SDs of the specified information well in advance of the effective date of the new reporting requirements.

NFA has determined that swap valuation dispute information is relevant for risk monitoring purposes. SDs will be required to file notices of disputes involving collateral pursuant to an eligible Master Agreement, including any applicable Schedule and Credit Support Annex (Collateralized Eligible Master Netting Agreement)3 that exceed the $20 million Reporting Threshold (after the Resolution Period). This reporting requirement is applicable to disputes involving the exchange of collateral regardless of whether the CFTC margin requirements are applicable to the swaps transactions. For transactions with a counterparty with which the SD does not exchange collateral, the SD will be required to report disputes involving the portfolio valuation when the counterparty notifies the SD that it is disputing any reported valuation by the SD and the disputed amount exceeds the $20 million threshold (after the Resolution Period).

The purpose of this Interpretive Notice is to provide SDs with more information on the required filings.

Required Filings

With regard to each of the filings described below, if the dispute involves two SD counterparties, then each SD is required to file a separate notice of the dispute.

a. Initial Margin Disputes

Counterparties to one or more swap transactions may not agree on the amount of initial margin (IM) that is to be posted or collected by each party pursuant to a Collateralized Eligible Master Netting Agreement. An SD is required to file a notice of any dispute regarding the amount of IM to be posted or collected if the amount in dispute exceeds the $20 million Reporting Threshold (after the Resolution Period).

b. Variation Margin Disputes

Counterparties to one or more swap transactions may also disagree on the amount of collateral to be exchanged from one party to the other for variation margin pursuant to a Collateralized Eligible Master Netting Agreement. An SD is required to file a notice of any dispute regarding the amount of variation margin to be exchanged if the amount in dispute exceeds the $20 million Reporting Threshold (after the Resolution Period).

c. Swaps Transactions Where Collateral Is Not Exchanged

For those counterparties with which the SD does not exchange collateral, if the counterparty notifies the SD that it is disputing any valuation provided by the SD, the SD must report the dispute if it exceeds the $20 million Reporting Threshold (after the Resolution Period).

d. Other Filings

1. Notice Amendments for All Dispute Filing Types

SDs should not file a daily notice of a previously reported dispute even if the valuation dispute amount changes. SDs are required, however, to notify NFA of certain changes to the dispute amount on the 15th (or the following business day if the 15th is a weekend or holiday) and last business day of each month by amending any previously filed notice where the dispute amount has increased in $20 million incremental bands. For example, if a SD files a notice of a $30 million dispute, an amended notice updating the dispute amount is required if that dispute increases to $40 million or more and each subsequent $20 million increment (i.e., dispute amount increases to $60 million or more, $80 million or more, etc.). SDs are also required to amend a previously filed notice to update the dispute amount if the amount decreases at these $20 million increments. The determination of whether an amended notice is required is based on the dispute amount on the reporting date.

In the event an SD identifies any errors in the information reported in an open notice, the SD must amend the notice to provide the correct information.

2. Dispute Termination

SDs are also required to terminate disputes that are no longer reportable under CFTC Regulation 23.502(c) or this Interpretive Notice. Therefore, any SD that is a party to the originally filed dispute must electronically notify NFA by terminating the notice when the dispute is resolved. Termination notices are also due on the 15th (or the following business day if the 15th is a weekend or holiday) and the last business day of the month based on the dispute amount on the reporting date.

¹"Resolution Period" as defined in CFTC Regulation 23.502(c) (i.e., within three business days where the counterparty is an SD and within five business days for all others).

²See Performance of Certain Functions by the National Futures Association Related to Notices of Swap Valuation Disputes Filed by Swap Dealers and Major Swap Participants, 81 Fed. Reg. 3390 (Jan. 21, 2016).

³If no master netting agreement exists, the SD must report at the transaction level.